US bonds rise on a strong treasury auction as foreign investment remains eager to fun
$22B in three year notes were sold Tuesday, a record since the government resumed sales of the treasury in 2003. There are three auctions this week totaling $51B, and this lead-off really got things going well. Wednesday is the 5 year and Thursday the 10 year will be auctioned. For every dollar sold there were $2.38 worth of bids, topping the $2.01 from the last auction in February.
The success was helped by the rumors regarding hedge fund troubles, and that sent investors in the oft mentioned ‘flight to quality’ the US treasuries offer. Foreign central banks purchased 40.3% of the securities compared to 44% in February. That is still above the average of 38.3% (the range is from 18.7% to 53.6%). That shows the foreign investors continue to cycle their trading surpluses back into US financial assets. In other words they still eagerly seek to support the relationship where they produce the goods and the US consumes them.
For now that works for everyone. In the future when the Baby Boomers start to age and we don’t consume as much this relationship is going to change. With the US not putting our resources to work as we should, it is not going to be as pleasant a transition as it could be. As discussed last night, we gave away our technological lead when Greenspan and friends purposefully stalled the economy in 2000. We are currently shooting ourselves in the foot as well.
One of the things that is being totally missed in the social security debate is how the transfer payments of the current system fail to put those assets to use to build fixed assets we will need in the future to generate real wealth. The SS system takes assets out of the economy, but by simply passing them on to be consumed there is no reinvestment into the economy. Much like a tax the government imposes and then spends on services that don’t create assets, that money is a drain off of the economy.
What Greenspan and others have said (and what our elected officials who are addicted to spending our money are not hearing) is that these assets need to be invested back into the economy to generate the growth to raise our standard of living or at least support our current standard of living. Instead they are being basically thrown to the winds in a figurative sense. I am not saying the payments are not important; to the contrary they are very important and thus in order to keep them viable into the future we need to invest them in the economy via personal accounts so the dollars can be used to fund the economic and asset base growth needed to provide promised benefits in the future. Passing a dollar around the room does not do that. The key is to keep the money out of the government’s hands so it is not spent with nothing more than an IOU left in its place. As Ronal Reagan said, we have to stop feeding the fat man before he is going to be able to lose any weight.
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